U.S. equity markets continued to soar the final three months of 2017 as the S&P 500 finished higher for a ninth consecutive quarter even as volatility remained extremely restrained—the S&P never experienced a pullback greater than 3% the entire year. Congressional passage of U.S. corporate tax reform was the primary impetus for equities in the fourth quarter, though continued solid economic and earnings data domestically and abroad aided as well.

On the domestic front, the much-anticipated corporate tax cut was finally passed by Congress in December, cutting the statutory corporate rate from 36.5% to 21% effective January 2018 and including several other measures to incentivize corporate investments. This led equity investors to shift their focus toward sectors such as Consumer Discretionary, Industrials and Financials that should benefit from the lower tax rate. U.S. stocks also rallied on solid third-quarter earnings that seemed to shrug off the effects of a destructive hurricane season; strong macroeconomic data; and robust holiday retail sales. Real GDP was revised to 3.2% for the third quarter, marking the first back-to-back 3%+ quarters of annualized GDP growth since 2014. The U.S. Federal Reserve also continued to pull back stimulus, raising its target funds rate a quarter point for a third time in 2017 to a range of 1.25-1.50% and initiating balance-sheet reduction. Looking abroad, countries in Europe and Asia also enjoyed improving economies despite several geopolitical conflicts, including continued Brexit discussions, the Catalonian vote for independence from Spain and North Korea’s ongoing provocations.

With the calendar set to turn to 2018, there were signs 2017’s momentum should continue. A number of U.S. companies announced pay increases, bonuses and capital investments on the back of the announced tax reform, and earnings estimates were trending higher as the fourth quarter wound down. Tame inflation and a still accommodative Fed also were being viewed as supportive for the risk markets. Among the clouds that could dim this bullish scenario are the potential for a surprise breakout in inflation, midterm elections in Washington as well as critical elections overseas. Infrastructure investment and possibly entitlement reform are among issues likely to garner domestic focus in coming months, while pending Italian elections and German Chancellor Angela Merkel’s struggles to form a cohesive governing coalition bear watching. Given relative market valuations, which are cheaper thanks to the tax cut but not inexpensive, we think a balanced portfolio of cyclical and defensive companies that have strong cash flow, balance sheet strength and improving fundamentals could help navigate the current investment landscape.

On the municipal side, yields on intermediate and short-term Treasury securities increased while yields on long-term Treasury securities declined during the quarter amid ongoing economic expansion, incremental Fed tightening, continued modest inflation and tax reform’s enactment. Two- and 10-year Treasury yields increased 40 and 7 basis points, respectively, while the 30-year Treasury yield decreased 12 basis points. Municipal bond yields followed a similar pattern over the quarter, after some bouts of volatility related to a record surge in municipal issuance late in the year ahead of the effective date for tax policy changes. The surge in supply was met with strong demand, thus allowing yields on intermediate and long-term municipal bonds to decline more than was observed in the Treasury market. Municipal Market Data (MMD) 2-year AAA tax-exempt yields increased 56 basis points while the 10- and 30-year AAA tax-exempt yields decreased by 2 and 30 basis points, respectively.

During the quarter, the S&P 500 Index returned 6.64% and the Russell 1000 Value Index returned 5.33%. The S&P Municipal Bond Index posted a return of 0.64%, the Bloomberg Barclays Treasury Index returned 0.05%, and the Barclays Aggregate Bond Index returned 0.39%.

Performance quoted represents past performance, which is no guarantee of future results. Investment return and principal value will fluctuate so that an investor’s shares, when redeemed, may be worth more or less than their original cost. Current performance may be lower or higher than what is stated. Other share classes may have experienced different returns than the share class presented. To view performance current to the most recent month-end and for after-tax returns, click on Performance tab. Performance does not reflect the maximum 5.5% sales charge for A Shares. If included, it would reduce the performance quoted.

Click on the Performance tab for standard fund performance.

Within the equity markets, growth stocks outperformed value stocks during the quarter, with the Russell 1000 Growth Index returning 7.86% while the Russell 1000 Value Index returned 5.33%. In terms of asset allocation, the Russell 1000 Value Index outperformed the S&P Municipal Bond Index, the broader Barclays Aggregate Index and the Barclays Treasury Index. The fund is overweight equities at 48.5% of its asset allocation relative to its neutral 40% equity index exposure. The equity relative overweight, which has helped performance since 2010, was a positive contributor during the quarter.

Within the fund’s equity holdings, stock selection and sector allocation both added to the overall performance of the fund. Relative to the benchmark, the fund’s top contributing sectors were Industrials, Consumer Staples and Consumer Discretionary. The sectors that most negatively contributed to fund performance were Materials, Information Technology and Financials.

On an absolute basis, the five securities contributing most to performance were Wal-Mart, Caterpillar, Texas Instruments, PBF Energy, and Bank of America. The five positions detracting most from performance were Sempra Energy, Walgreens, Amerisource Bergen, Ablemarle and Jabil Inc.

The S&P Municipal Bond Index posted a return of 0.64%. The 3-year component of the index posted a loss of 0.92%, while 10-year component returned 0.60% and the portion of the index maturing in 22 years and longer returned 2.14%. The AAA/Aaa component of the index returned 0.40%, the A-rated component returned 0.87% and the BBB-rated component returned 1.55%. The S&P Intermediate Municipal Bond Index posted a return of 0.11%. The S&P High Yield Municipal Bond Index returned 0.96%, but rose 2.00% when excluding sharply underperforming Puerto Rico bonds.

Click on the Portfolio Characteristics tab for information on quality ratings and the fund’s top 10 holdings.

Positioning and Strategy

The fund’s equity holdings are positioned within a diversified portfolio of qualified dividend-paying stocks with favorable valuations, strong balance sheets and improving business fundamentals. The portfolio continues to aim for a balanced yield, dividend growth and total return strategy. Over the reporting period, the average sector overweight positions relative to the fund’s benchmark included Information Technology, Industrials and Consumer Discretionary. The fund’s largest underweight positions included the Financials, Real Estate and Health Care sectors.

Bond strategy integrates views on both interest-rate and credit cycles. The bond portfolio manager attempts to add incremental return through active management of duration and credit risk, allocation among credit sectors, positioning on the yield curve and bond selection.

The bond portfolio manager strives to balance the fund’s primary objective of tax-advantaged income and secondary objective of total return. The fund remains focused on intermediate and long-term securities and the tactical use of mid-to-lower credit quality bonds to enhance income and total return potential.

Key Investment Team

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Investors should carefully consider the fund's investment objectives, risks, charges and expenses before investing. To obtain a summary prospectus or prospectus containing this and other information, contact us or view the prospectus provided on this website. Please carefully read the summary prospectus or prospectus before investing.

Mutual funds are subject to risks and fluctuate in value. Click on Performance for fund specific risks.